A home appraisal is a third-party, unbiased assessment of your property’s value. It compares your house to other homes being sold in your area to determine the fair market value.
Lenders often demand a home appraisal during escrow to assess whether the home justifies the loan. They want to make sure that you’re not borrowing too much for what the house is worth. If your home’s value falls short, your lender may not fund the loan.
Home appraisals and home inspections are two different things and serve completely different purposes. A home appraisal usually comes at the end of the escrow process to determine the fair market value of the home. If the appraisal is low, buyers have the opportunity to negotiate the price down.
A home inspection, however, happens early in the escrow process and gives a home buyer the details needed to fully understand the condition of the property. An inspection looks at all systems and essential structural components to see what is in working order, what needs to be replaced, and what may cause problems in the future. Homebuyers may walk away from a house after an inspection, or they can use it to negotiate repairs or price reductions in the home.
Your mortgage lender typically requests the home appraisal and chooses the appraiser. However, the appraiser is licensed by the state and is an impartial party to the transaction. This means they have no stake in how the home appraisal turns out and the results aren’t skewed toward any one party’s desired outcome.
The appraiser walks around the property creating a plot plan with an outline of the home while also noting important details, such as:
But a home appraisal goes far beyond just inspecting your house. The appraiser also considers other houses in the area that have either been recently sold or are up for sale. These are called comparables. Your home is compared to the size and quality of these other houses, and its appraisal value is in large part determined by what other similar homes in the area are going for.
Home appraisals usually end up with a written report using the Uniform Residential Appraisal Report created by Fannie Mae. This helps make sure that appraisers are following the same guidelines for fairness when appraising properties.
The appraisal report typically includes:
A number of things can hurt a home appraisal. Probably the most common is if your home is in worse condition than the comparables in the area. Then your appraisal will be below the comparables’ fair market value, so you want to clean up your property as much as possible and repair anything that’s clearly broken or damaged before seeking an appraisal.
Another common problem for homeowners seeking appraisals is if home prices in the area are down. This can be especially true if someone else sold a home recently for below the market value. While a good appraiser may be able to determine the reason for the outlier, it could point to a downward trend in home values in the area.
Many online sites estimate that an appraisal costs anywhere from $300 to $500, but they can vary even more depending on your area and the size of the home. Higher-end real estate markets such as San Francisco can see appraisals upwards of $750 or more. Your lender will give you the actual cost of the appraisal when it is ordered, but they will most likely provide a realistic estimate for your area at the start of escrow.